China Isn’t Quite the Economic Headache Presidential Candidates Want it To Be

Both Hillary Clinton and Donald Trump take aim at China for U.S. economic woes. But reality paints a more nuanced picture.

Donald Trump, the Republican front-runner for the GOP presidential nomination, constantly rails against China. Like Mitt Romney before him in 2012, the billionaire businessman blasts what he considers Beijing’s deliberate use of a devalued currency to flood world markets with Chinese goods, hurting American manufacturers. Now, Democratic front-runner Hillary Clinton is getting in on the act.

Both presidential contenders take aim at the same culprit. But their particular gripes reflect a different understanding of what’s driving the seismic changes that are roiling the global economy. Trump still thinks China is “winning.” Clinton worries about the fallout as China’s once-soaring economy crashes back to Earth.

As its sluggish economy drags down the rest of the world’s markets, China is serving as a convenient target on the 2016 campaign trail, especially as working-class angst fuelspolitical insurgencies. That’s been the case in the past, too, when U.S. politicians eagerly blamed Beijing for spiking commodity prices and birthing huge U.S. trade deficits.

Leaders in Beijing “know that during the U.S. political season before presidential elections, China is now a regular target,” Sean Miner, China program manager at the Peterson Institute for International Economics, told Foreign Policy. “They know it’s rhetoric.”

Clinton has already turned her back on the free-trade legacy of her husband’s administration, as well as the Trans-Pacific Partnership — a massive Pacific Rim trade deal she once supported and one that continues to be championed by the Obama administration. She is now toughening her talk against Chinese trade, and most recently took aim at Beijing for “dumping” cheap steel on global markets, which hammers local steelmakers from the United States to the United Kingdom.

“I’ve gone toe-to-toe with China’s top leaders on some of the toughest issues we face. I know how they operate — and they know that if I’m president, the games are going to end,” the former secretary of state said this week.

Trump has spent years accusing China of “eating our lunch,” and for just as long has fingered its allegedly cheap currency as the main culprit. He continues to call an artificially cheap yuan, or renminbi, the main driver of China’s trade prowess. A cheaper currency makes exports more competitive.

But that’s no longer the case, and it may not even have been true in recent years, since China started allowing its currency to appreciate against the U.S. dollar and other global currencies. By many analyses, for example, the yuan was fairly valued even in 2011 and 2012, when Romney promised to declare China a “currency manipulator” on his first day in the White House.

Speaking Wednesday in Pittsburgh, once decimated by the loss of its steel industry to Chinese competitors, Trump vowed to restore the city to its 20th century industrial glory.

“When I’m president, guess what, steel is coming back to Pittsburgh,” Trump said, adding he would return the nation to a time when “wage earners could support their family on the income from the mill.” He added, “Steel, we’re bringing it back. Coal — clean coal, clean coal — we’re bringing it back.”

His pledge came despite the fact that Pittsburgh has rebounded to become a tech hub; Google, for example, now employs more than 200 people working on engineering projects in the Steel City. But the line received loud applause — indicating many in the audience don’t understand the dynamics of the modern global economy.

“They’re playing off the lack of knowledge about the real economic and trading relationship between China and the United States,” Miner said.

The real driver of the flood of cheap Chinese exports, economists say, are the structural flaws in the Chinese economy that have become only more glaring since the global financial meltdown.

For decades, China promoted economic growth by investing in heavy industry, including by underwriting cheap loans by state-run banks that have enabled big manufacturers to keep producing steel, aluminum, cement, chemicals, and more — even when each ton that rolls out of the factory costs more to make than it earns.

Despite plans to rebalance its economy more toward domestic consumption and away from heavy industry, China simply doubled down on that capital investment model to deal with the fallout from the financial crisis. The country’s 4 trillion yuan stimulus package in 2008-09 was one of the biggest in the world, and helped prop up employment in key sectors like steel and cement. Chinese Industry Ministry officials confirmed last weekendthat massive overcapacity will continue in the steel industry, because the political costs of closing failing businesses and throwing their workers into unemployment are too high.

Yet the Chinese economy is cooling, with growth rates falling from about 10 percent annually for the past decade; right now, the World Bank estimates China’s GDP will grow by 7.1 percent this year. The International Monetary Fund is a bit more bearish, projecting 6.5 percent growth in 2016. That has dampened domestic demand for everything from steel beams to cement to specialty chemicals, even as production capacity in those sectors has soared. The only outlet? Exporting that surplus to the global market.

Sen. Rob Portman, the Bush administration’s top trade representative and director of the White House Office of Management and Budget, agrees with Trump that China is manipulating its currency and said Beijing has let the yuan slide to be used as a trade weapon. But the Republican senator from Ohio, who is up for re-election this year, also supports Clinton’s accusation that Beijing is meddling with the global steel market.

Asked whether the U.S. might demand tariffs or complain to the World Trade Organization — or simply freeze out China of free trade deals — Portman said with a laugh that Washington should consider “all of the above.”

China is by far the world’s biggest steel maker and exporter. The massive overcapacity in Chinese steel manufacturing is pushing cheap rebar and plate to markets around the world; Britain is grappling with the death of its own iconic steel industry thanks in large part to a flood of cheap Chinese steel, for example. And since the United States is the biggest steel importer in the world, that flood of below-market price Chinese metal makes life even tougher for U.S. steelworkers —especially in critical swing states like Ohio and Pennsylvania.

And it’s not just steel. For everything from aluminum, tires, specialty chemicals, and oil refining to metallurgical coal, the double whammy of soaring Chinese production and wheezing Chinese demand is exporting pain around the world. U.S. coal companies are going bankrupt in large part not because of tougher environmental rules, but because China has all but stopped importing high-quality, highly-priced coal from the United States for use in steelmaking.

Portmansaid the U.S. can compete with China and bring back manufacturing jobs — “if there’s a level playing field.” American innovation and productivity, he noted, now make it easier for U.S. firms to compete with Chinese companies whose labor-cost advantage has eroded over the past decade. Many manufacturers have decamped from China to Vietnam, Cambodia, and elsewhere looking for cheap labor.

“What we can’t compete with is selling product below its cost, which is illegal, or subsidizing the product, which is illegal,” he told FP after testifying Tuesday at an International Trade Commission hearing on the global steel industry.

The harsh U.S. political rhetoric isn’t lost on Chinese leaders, said Andrew Small, a China expert at the German Marshall Fund. But he said Beijing knows the criticism is as much noise as substance.